Muni Bond ETFs -- No Vanguard options?

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tj-longterm
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Muni Bond ETFs -- No Vanguard options?

Post by tj-longterm » Thu May 16, 2013 9:35 pm

Does anyone know why there are no municipal bond ETFs available at Vanguard? Are there good alternatives?

I'm trying to deal with a portfolio that isn't located at Vanguard, which means Admiral shares are not available (which gives a huge preference to ETFs).

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stratton
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Re: Muni Bond ETFs -- No Vanguard options?

Post by stratton » Thu May 16, 2013 9:45 pm

Vanguard doesn't have a muni bond etf.

Ishares has several. MUB is intermediate and SUB is short term.

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Re: Muni Bond ETFs -- No Vanguard options?

Post by tj-longterm » Thu May 16, 2013 9:59 pm

stratton wrote:
Ishares has several. MUB is intermediate and SUB is short term.
Are they comparable in quality to the Vanguard Admiral Fund offerings? What about a "long term" option comparable to VWLUX (only a slightly longer duration than intermediate, but a much higher yield)?

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ogd
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Re: Muni Bond ETFs -- No Vanguard options?

Post by ogd » Fri May 17, 2013 4:33 pm

I use TFI for some money parked at Schwab, and it seems to fit what you're looking for. I like it because of a couple of things that you may or may not care about:

1) commission free at Schwab
2) low % in Cali bonds versus peers (11.5%). I have a larger position in VCADX that this is diversifying, and I hate owning CA bonds that I'm not getting the tax discount on (CA requires >= 50% to apply even a weighted exemption, grrr).
3) ETF premium/discount seems routinely lower than MUB, the other large fund in this space

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Re: Muni Bond ETFs -- No Vanguard options?

Post by DaveS » Fri May 17, 2013 6:59 pm

Yup. If your too snooty to have an admiral fund, the ETF TFI is a very good substitute. Dave

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Re: Muni Bond ETFs -- No Vanguard options?

Post by tj-longterm » Sat May 25, 2013 12:29 pm

I've finally looked into these more.

TFI has an expense ratio of 0.23%
MUB has an expense ratio of 0.25%

So, why are these good alternatives to Vanguard Muni admiral class funds? The Vanguard Long-Term Tax-Exempt Investor fund has an expense ratio of 0.20%.

It appears I'm better off buying the non-admiral Vanguard Muni bond fund (assuming, as is the case, that I can't buy the admiral class in this account), than the ETFs offered by other companies.

Or am I missing something? Do ETFs exist for muni bonds with lower expenses? For comparison, the Vanguard Long-Term Tax-Exempt Admiral fund has an expense ratio of 0.12%

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Kevin M
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Re: Muni Bond ETFs -- No Vanguard options?

Post by Kevin M » Sat May 25, 2013 1:26 pm

Why don't you just move the money to Vanguard?

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Re: Muni Bond ETFs -- No Vanguard options?

Post by tj-longterm » Sat May 25, 2013 1:34 pm

Kevin M wrote:Why don't you just move the money to Vanguard?
It would be rather complicated and involve a change in corporate trustees, I believe. And I'm not sure that Vanguard offers trust services for self-directed (non-managed) accounts?

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Re: Muni Bond ETFs -- No Vanguard options?

Post by Kevin M » Sat May 25, 2013 2:10 pm

Got it. I would ask them about their trustee services. Maybe you could save some money there as well. Please let us know if you pursue it.

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Re: Muni Bond ETFs -- No Vanguard options?

Post by ogd » Sun May 26, 2013 12:10 pm

tj-longterm wrote:So, why are these good alternatives to Vanguard Muni admiral class funds? The Vanguard Long-Term Tax-Exempt Investor fund has an expense ratio of 0.20%.

It appears I'm better off buying the non-admiral Vanguard Muni bond fund (assuming, as is the case, that I can't buy the admiral class in this account), than the ETFs offered by other companies.
Your post asked specifically for ETFs. The Vanguard fund is better on the expense ratio, but I'd have to pay $76 per trade to buy it at Schwab, which makes it not worth it. So watch out for that.
tj-longterm wrote:Or am I missing something? Do ETFs exist for muni bonds with lower expenses? For comparison, the Vanguard Long-Term Tax-Exempt Admiral fund has an expense ratio of 0.12%
I don't think you're missing anything. Munis are somewhat harder to manage than other asset types, so they can't make very cheap ETFs. They are also more illiquid, so I'm guessing Vanguard isn't too keen on letting day-traders play with their funds via an ETF share.

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Re: Muni Bond ETFs -- No Vanguard options?

Post by Rick Ferri » Sun May 26, 2013 2:00 pm

tj-longterm wrote:Does anyone know why there are no municipal bond ETFs available at Vanguard?
It's because there are no municipal bond index funds. Vanguard municipal bond funds are actively managed.

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Re: Muni Bond ETFs -- No Vanguard options?

Post by baw703916 » Sun May 26, 2013 2:13 pm

Rick Ferri wrote:
tj-longterm wrote:Does anyone know why there are no municipal bond ETFs available at Vanguard?
It's because there are no municipal bond index funds. Vanguard municipal bond funds are actively managed.

Rick Ferri
The major practical difference is that the Admiral threshold is $50K rather than $10K.

Or maybe Vanguard is convinced that active management can outperform in TE bonds (and TIPS) ;)
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Re: Muni Bond ETFs -- No Vanguard options?

Post by Kevin M » Sun May 26, 2013 3:22 pm

Vanguard's investment-grade funds are actively manged, yet they came out with corporate bond ETFs. Granted, they also have mutual fund share classes for these funds, but only Signal and Institutional, so nothing for the retail investor other than the ETFs.

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Re: Muni Bond ETFs -- No Vanguard options?

Post by Jack » Sun May 26, 2013 6:05 pm

tj-longterm wrote:
Kevin M wrote:Why don't you just move the money to Vanguard?
It would be rather complicated and involve a change in corporate trustees, I believe. And I'm not sure that Vanguard offers trust services for self-directed (non-managed) accounts?
Sure they do. And it is absolutely free, just like an IRA. They are the custodian. You are the trustee and buy and sell online just like any Vanguard account.

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Re: Muni Bond ETFs -- No Vanguard options?

Post by Electron » Sun May 26, 2013 6:22 pm

An ETF might not be the best choice for investing in Municipal bonds. Passively managed ETFs must track an index, and those indexes generally hold only liquid issues that trade in reasonable volume every day.

An actively managed Municipal Bond fund would have an advantage since it could invest in more thinly traded and unrated issues. Note also that the Municipal Bond market is extremely large in terms of the number of available securities in the marketplace. Many of those bonds might not even trade on a given day.
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Re: Muni Bond ETFs -- No Vanguard options?

Post by grabiner » Sun May 26, 2013 9:43 pm

Electron wrote:An ETF might not be the best choice for investing in Municipal bonds. Passively managed ETFs must track an index, and those indexes generally hold only liquid issues that trade in reasonable volume every day.
It seems to have worked OK; the ETF MUB tracks Vanguard's index-like mutual fund VWITX almost perfectly, with a 2% deviation in 2008 when there were liquidity issues and its slightly longer duration may also have hurt it. (MUB has an expense ratio five points higher, and 13 points higher than the Admiral shares VWIUX, so that is an advantage for the Vanguard funds as long as you don't need to use ETFs.)
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Re: Muni Bond ETFs -- No Vanguard options?

Post by Electron » Mon May 27, 2013 3:44 pm

grabiner wrote:It seems to have worked OK; the ETF MUB tracks Vanguard's index-like mutual fund VWITX almost perfectly, with a 2% deviation in 2008 when there were liquidity issues and its slightly longer duration may also have hurt it.
I just compared the two funds using the Performance Tab on Morningstar and agree that the ETF and Mutual Fund have tracked quite closely. The iShares website provides a lot of information on MUB and it is surprising that the fund holds 2376 securities. In addition, the fund has traded very close to NAV a high percentage of the time. It has tended to trade at a small premium to NAV but that would not be a serious issue for a longer term holder.

It will be interesting to see how the ETF performs in periods of rising rates. Perhaps it will trade at a discount more of the time. One concern about bond ETFs in less liquid markets is that they generally have to buy or sell all securities in the index when assets are coming into or out of the fund. They may not get the best pricing on individual securities in times of heavy buying or selling. Dealers and opened ended mutual funds can take advantage of the ETFs. I read about this situation not long ago in regards to the large junk bond ETFs. Open ended funds such as Vanguard or Fidelity may actually trade against them, meaning that they can buy certain securities at low prices during a sell off, and sell certain securities at high prices during an upswing. More importantly, they are free to buy or sell only what they choose when the price of a security appears attractive to them.
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Re: Muni Bond ETFs -- No Vanguard options?

Post by Kevin M » Mon May 27, 2013 4:04 pm

^I believe it's for reasons such as those you're stating that Rick Ferri decided not to own bond ETFs, but to stick with traditional bond mutual funds.

Personally, I have held some LQD (intermediate-term corporate; it's classified as long-term, but I think duration is less than 7 years) since 2007 or 2008, and added to it during the 2008 crisis, but have been selling it off as rates have declined (and buying CDs of course). I still own some, but it's only about 1% of my portfolio. I also have owned high-yield ETFs JNK, HYG, and PHB, but recently sold all of my HYG; again, a small percentage of my portfolio.

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Re: Muni Bond ETFs -- No Vanguard options?

Post by Electron » Tue May 28, 2013 1:41 pm

Kevin M wrote:I believe it's for reasons such as those you're stating that Rick Ferri decided not to own bond ETFs, but to stick with traditional bond mutual funds.
It is nice to think that active managers can add value with astute security selection, but in reality indexing probably continues to work well. The active managers probably make decisions that both add value and subtract value which offset each other over time.

Perhaps a better reason to use the traditional open ended fund is that a bond ETF in less liquid markets could trade at a premium when you choose to buy and at a discount when you choose to sell. There may also be a commission for each trade. Lastly, I feel more comfortable with a traditional mutual fund holding all fund assets rather than an ETF. I don't know if that feeling is justified, but the ETF is a more complicated structure involving various brokerage firms, authorized participants, arbitrage, and the use of borrowed securities at times.
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